This guide looks at the VAT treatment of some recurring themes we have seen for businesses we work with.
Hospitality for teams
Case study one: Nigel, a director of a growing company decides he wants to treat all the team to a night out at a top restaurant with free food and drink for everyone. Top customers and ‘other halves’ are invited to join the party.
Whilst this is a nice opportunity to celebrate with the team, from a tax perspective there is an input tax block on all costs relevant to the customers and ‘other halves’ because of the business entertaining rules. On a more positive note the employee costs should be fine, because free supply of food and drink to staff is a legitimate business expense.
But beware! If the staff are expected to act as hosts to the customers (essentially working at the event), the input tax is also blocked on their costs. But if they can be part of the event with no hosting or other work duties a claim on their costs is fine.
The relevant HMRC guidance (extract) is as follows:
“Where an employer provides entertainment for the benefit of employees for example to reward them for good work or to maintain and improve staff morale, it does so wholly
for business purposes.
Thus the VAT incurred on entertainment for employees for example staff parties, team building exercises, staff outings and similar events is input tax and is not blocked from recovery under the business entertainment rules.”1
The guidance also states:
“If the entertainment is provided only for directors or partners of a business the VAT incurred is not input tax. This is because the goods or services are not used for a business purpose. The VAT cannot, therefore, be recovered.”2
For refs 1 and 2 plus detailed HMRC guidance on this topic go to para 3.3 at https://www.gov.uk/guidance/business-entertainment-and-vat-notice-70065
Gifts of goods and services
If no payment is received or required from a recipient for a present, then this is known as a gift of goods. Bear in mind, that payment can be in a non-monetary form such as bartering.
A company offering free of charge services is not usually liable for output tax but the rules are different for goods.
Output tax for goods is not due if the value of the gift (including the total of all gifts given to the same individual in any 12mth period) is less than £50. The £50 excludes VAT and is based on the cost of the item to the business as opposed to the retail price.
If the £50 limit is exceeded over a 12mth period then the goods are subject to output tax.
Case study two: Sarah is registered for VAT as a gift retailer, she gives Jennifer (top performing employee) the following gifts from her stock. She receives a £35 pamper gift in January 2020, a £35 bottle of wine in May 2020 and a £40 hamper in December 2020. This total value exceeds the £50 limit in the 12 months to December 2020 so output tax is due on Sarah’s return. However, she can claim input tax on the original purchase of the gifts from her supplier.
For detailed HMRC guidance on this go to para 2.3 at https://www.gov.uk/guidance/business-promotions-and-vat-notice-7007.
Output tax – VAT on sales of goods and services – VAT owed to HMRC.
Input tax – VAT incurred on purchase of goods and services – VAT you can reclaim from HMRC.
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Disclaimer: The document is provided as a guide only and we recommend seeking professional accounting advice before making decisions. Use of this guide is for reference only. Specialist Accounting Solutions Ltd accepts no liability for any errors therein or any losses or damages arising from it.